Intro to Financial Accounting: Adjusting entries, unearned/accrued, revenue/expense

Introduction to Financial Accounting
Professor Alexander Sannella
Lecture 7

Learning Objective 3

0:31 Unadjusted Trial Balance
1:26 Example
2:20 Adjusting Entries
3:09 Example
3:21 How to record adjusting entries
7:47 Adjusting Journal Entries
10:23 Adjustment Summary
10:39 Types of Adjustments
11:03 Accruals vs. Deferrals
13:19 2 types of deferrals
14:33 Prepaid expense (deferral)
22:22 Depreciation (deferral)
34:24 Summarize (depreciation)
35:10 Depreciation example
48:08 Summary (deferred cost)
51:17 Unearned Revenue
56:39 Accrued Expense
1:01:04 Visual Example
1:05:49 Accrued Revenue

Question and Explanation
1:10:08 Question 1

Introduction to Financial Accounting
Professor Alexander Sannella
Lecture 7

Learning Objective 3

0:31 Unadjusted Trial Balance
1:26 Example
2:20 Adjusting Entries
3:09 Example
3:21 How to record adjusting entries
7:47 Adjusting Journal Entries
10:23 Adjustment Summary
10:39 Types of Adjustments
11:03 Accruals vs. Deferrals
13:19 2 types of deferrals
14:33 Prepaid expense (deferral)
22:22 Depreciation (deferral)
34:24 Summarize (depreciation)
35:10 Depreciation example
48:08 Summary (deferred cost)
51:17 Unearned Revenue
56:39 Accrued Expense
1:01:04 Visual Example
1:05:49 Accrued Revenue

Question and Explanation
1:10:08 Question 1

The trial balance that was generated in Chapter 2 is generally referred to as an unadjusted trial balance. This trial balance shows the raw accounting data before ensuring that all revenues and expenses are properly matched. After we apply the time period concept, the revenue recognition principle, and the matching principle, we often find that adjustments to the “raw” trial balance are needed.

Accounts are not adjusted on a daily basis. Revenues and expenses are not “up to date” at the end of an accounting period and adjustments are needed. Adjusting entries are only made at the end of the accounting period and are internal events (these entries do NOT reflect transactions with external parties). For example, office supplies can be used up but not that usage is not recorded until the end of the period.

Adjustments to the trial balance are made by recording actual adjusting journal entries. Each adjusting journal entry will adjust a balance sheet account and an income statement account, but never affects cash.

Adjusting entries are required because these entries ensure that revenues are recorded in the period in which they are earned and that expenses are recognized in the period in which they are incurred. Some entries are not made on a daily basis from a cost benefit perspective. For example, we do not record supplies expense each time a machine is oiled in a factory or a toner cartridge is replaced in a copy machine.

Some costs are not recorded because they are only earned or incurred with the passage of time. Examples include consumption of auto insurance coverage or depreciation of an automobile. Some entries are not made because the information itself is not available. You do not receive your utility bill for June until July. Adjusting entries are required every time financial statements are prepared. Overall, every adjusting entry affects one balance sheet account, one income statement account, and has no cash flow effects.

Accruals are when the economic event is recognized before the cash event occurs. Prepaids are when the economic event is recognized after the cash event. There are two types of deferrals or prepaids – prepaid expenses and unearned revenues. Prepaid or deferred costs represent a prior cash expenditure related to a resource that will be used in the revenue-generating process. an unearned revenue is an advance receipt of cash from a customer that obligates us to either deliver a product or perform a service for a customer in the future.

Long-lived, tangible assets assets used to generate revenue are referred to as plant assets. Plant assets are actually long term prepaid expenses or deferred costs. Most prepaid adjusting journal entries are related to the adjustment of a current asset account. However, long-lived tangible assets are also used by the company to generate revenues. They act much like other prepaid assets, except for their longer life. At the end of each fiscal period, it is necessary to “adjust” the long-lived tangible asset accounts to account for the consumption of their usefulness. This process is called “depreciation” and is an important prepaid adjustment each period.

Additional Tags: expense recognition, useful life, estimated useful life, tangible asset, depreciation, depreciation expense, accumulated depreciation, contra-asset, debit, credit, balance, straight-line, cost, residual value, and capitalization.

Category: Accounting